Options basics · Article · 8 min read

Options terms, made simple

Call, put, strike, premium, in the money, time value, the Greeks: the words you need before your first options trade, with pictures.

An option in one sentence

An option is a contract that gives you the right, but not the obligation, to buy or sell a stock at a fixed price until a fixed date.

Think of it as a reservation ticket: you pay a small fee today to lock a price. If the deal becomes good, you use it. If not, you let it expire and lose only the fee.

Call and put

Call: the right to BUY at a fixed price. You buy a call when you think the price will go up.
Put: the right to SELL at a fixed price. You buy a put when you think the price will go down.
Easy way to remember: call it up, put it down.

Strike and expiration

Strike: the fixed price written in the contract. A “100 call” lets you buy at 100.
Expiration: the last day the contract is alive. After it, the option is worth only what it is in the money, or nothing.
0DTE: “zero days to expiration”, a contract that expires today. Monthly options expire on the third Friday; many stocks and ETFs also have weekly ones, and SPY, QQQ, SPX and NDX have one for every weekday.

Premium and contract size

The premium is the price of the option. In the US one contract covers 100 shares, so a premium of 2.00 costs 2 × 100 = $200.

For the buyer, the premium is the most that can be lost. For the seller, it is the most that can be earned.

In, at and out of the money

These three words say where the strike sits compared with the stock price right now.

ITM (in the money): the option already has real value. A call with a strike below the price, or a put with a strike above it.
ATM (at the money): the strike is about equal to the price.
OTM (out of the money): no real value yet, only hope. It needs the stock to move toward the strike. Cheap, but most expire worthless.

Intrinsic value and time value

Every premium has two parts.

Intrinsic value: what the option would be worth if it expired right now. A 100 call with the stock at 105 has 5 of intrinsic value.

Time value: the extra you pay for the chance of a bigger move before expiration. It melts every day, slowly at first and fastest in the last days and hours. This melting is called time decay.

Breakeven: buyer and seller

The buyer needs the stock to move past the strike by more than the premium paid. That point is the breakeven.

Call breakeven = strike + premium. Put breakeven = strike − premium.

The seller takes the other side: keeps the premium if the option expires worthless, but takes the loss if the stock moves far. Buyers pay for possibility; sellers get paid to take the risk.

Implied volatility (IV)

Implied volatility is how much movement the options market is pricing in. High IV means expensive options because a big move is expected, as before earnings or a big report. Low IV means cheaper options.

IV turns into a price range called the expected move; the lesson “What is the expected move?” shows how to read it on a chart.

The Greeks, one line each

Delta: how much the option moves when the stock moves 1. A delta of 0.40 means about +0.40 for every +1 in the stock. It is also a rough chance of finishing in the money.
Theta: how much value the option loses per day just from time passing.
Gamma: how fast delta changes. It is largest at the money and close to expiration, which is why 0DTE options can jump so much.
Vega: how much the option changes when IV moves 1 point.

Words you see on the screen

Bid / ask: the best price buyers pay / the best price sellers want. The gap is the spread; a wide spread costs you on entry and exit.
Volume: how many contracts traded today.
Open interest: how many contracts are still open. High volume and open interest mean a liquid strike.
Exercise / assignment: the buyer uses the right / the seller is told to deliver. Most traders close positions before expiration instead.
American vs European: American-style (SPY, stocks) can be exercised any day; European-style (SPX, NDX) only at expiration, and index options settle in cash.

Key takeaways

Call = right to buy, put = right to sell, at the strike, until expiration.
Premium × 100 = cost of one contract. The buyer cannot lose more than the premium.
ITM has real value, OTM is only time value and hope.
Time value melts fastest at the end. Breakeven = strike ± premium.
High IV = expensive options. Delta for direction, theta for time.